A change in my positions

Investment Analysis Clubs Saul’s Investing Discussions
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First of all, let me emphasize that my decisions are often wrong, and stocks often go up after I sell out of them (AMBA, for instance), so don’t sell just because I did if you have conviction in the company.

Now, I sold out of my position in UBNT. Why? A combination of four reasons.

  1. Last quarter! Granted that’s a very short term reason. However revenue was down sequentially, AND basically flat with the first quarter, AND up less than 10% from three quarters ago (Dec 2013). This isn’t seasonal as last year’s Sept quarter was $130 million up sequentially from $101 million (up almost 30% sequentially and up more than 100% year over year).

Adjusted earnings were 48 cents, DOWN from 56 cents sequentially, DOWN from 50 cents the quarter before that, and FLAT with 48 cents the quarter before that, and up only 2 cents from a year ago. That’s pretty much no growth in a year.

  1. Long term prospects! Their goal is to sell to WiFi Internet service providers (WISP’s) to enable internet in hard to reach places around the world. Well Google is working on establishing a network of balloons around the world to enable FREE internet in underdeveloped countries, Elon Musk is talking about setting up a network of satellites to enable FREE internet in underdeveloped countries, and some other companies are putting up limited numbers of satellites to provide internet access in underdeveloped… well you get the idea. Granted, this is all long range, and may never happen, but in a few years, technology may have made their whole business obsolete.

  2. Pera. He is the owner of the Memphis Grizzlies basketball team in the NBA. He seems to pay a lot more attention to the Grizzlies than to UBNT. Here’s an excerpt from a sports article (not an investing article) from May 2014 that I hit by just googling Robert Pera:

Robert Pera is the owner of the Memphis Grizzlies; that is to say, he’s the man at the epicenter of the NBA’s strangest spectacle over the past week. CEO Jason Levien and assistant general manager Stu Lash were abruptly fired last week, and coach Dave Joerger seemed all but sure to hit the road and accept the Minnesota Timberwolves’ vacant job. Instead, news broke Sunday night that Joerger would stay in Memphis despite the organizational turmoil.

As it turns out, Pera wanted to replace Joerger five games into his first season as a head coach, and Pera had some truly strange ideas as to how the team would move forward after hypothetically firing a coach with a 2-3 career record.

After the first five games of the season, Pera flew to Memphis and held individual meetings with players. In those meetings, he began offering a handful of suggestions, according to Sports Illustrated’s Chris Mannix, one of which was that Joerger should be fired as coach and replaced by player-coach Mike Miller…

Pera had A LOT of trouble in the Conference Call answering questions about UBNT’s sales. I’ll bet he was up on all the statistics of Grizzlie players. This is too much of a distraction. It’s what someone does when they retire from business, not while they are the CEO of a growing company. I was aware of this a year ago, but everything seemed to be going well for the company. Now I’m not so sure

  1. I found two companies I liked better to put my money in: CRTO and FB.

Hope this is of help.

Saul

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I’ll be holding my UBNT. Of everything I own, it’s actually one of my highest conviction holdings. That doesn’t mean it’ll be a successful investment, of course – I could certainly be wrong and Saul has more experience and a better track record than I do. So take what I say with a large grain of salt.

I personally think that what makes UBNT special is its disruptive business model. To see the power of that, look at Amazon: they started out as a book store, but their special sauce was technology, and they’ve applied it now to multiple retail industries and beyond (logistics, distribution, cloud services, and so on). Amazon is able to leverage its disruptive business model to move into adjacent industry categories and dominate them.

I see the same potential in UBNT with its community-driven business model. Just as Amazon started with books, UBNT started in the WISP space. But they’re proving, through the success of the Enterprise segment, that they can apply the same model in adjacent spaces successfully and deliver top-quality, customer-driven products at disruptive prices. That creates tremendous opportunity.

I think to focus too much on the WISP space as the long-term future of this company sells it short. But that aside, I also am skeptical of the threats to WISP you mention. We already have commercial satellite internet offered in the developed world, and it’s really expensive and very slow despite huge recent improvements. I’ve looked into it multiple times for our house, including just a couple months ago, and it just doesn’t make any sense. I genuinely doubt that free satellite systems are going to be superior to commercial ones, and there will always be a latency problem with satellites. Google’s Project Loon will also be slow, offering about 3G speeds according to their own website. Meanwhile, WISP systems using UBNT’s new airMAX AC systems can deliver fantastic performance while also being very reasonably priced. I just don’t see a realistic threat, and certainly not within the next decade.

Your other concerns were about last quarter and about Pera as a manager. Last quarter was uninspiring, as is the guidance for the next one. But a quarter or two is a tiny blip in the life of a business. The company has always said that revenues are lumpy, and Pera states we’re seeing that now. He might be wrong, but I also can’t really see any other reason for the slowdown beyond some political instability in a few regions. This smacks of a short-term issue to me.

I don’t know any more about the Grizzlies than you do, but I think you’re just making assumptions without any real evidence. I’m not saying you’re wrong, but most of Pera’s net worth is tied up in company stock, so he certainly has a vested interest in seeing the company be successful. At the very least, you’d think that if he were genuinely bored with the company he’d shop it around and try to cash out rather than destroy his net worth along with his life’s work to this point.

Finally, the stock is trading at a trailing P/E under 15, and a forward P/E closer to 12. The market has already priced the company as if it’s going nowhere, but – even if its Service Provider (WISP) segment does stagnate, which I doubt – its Enterprise Segment is continuing to grow rapidly and has a much larger potential market.

I found two companies I liked better to put my money in

I can’t argue with that :wink: But I do plan to hold my UBNT shares.

Neil
Long UBNT

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Why FB and CRTO?

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Thanks Neil, as I started out saying, I may be very wrong.
Saul

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Why FB and CRTO?

Hi Buylower, I’d have to send you back to Anirban’s extraordinarily lucid three-part write-up starting with posts #4342 and #4343, and part 3 following a bit later.

Here’s a bit about what they do, taken slightly modified from Anirban’s description:

Criteo is in the business of delivering personalized advertising, which is broader than “re-marketing” or “re-targetting”. With “re-targetting” advertisers are targeting users (i.e., visitors to websites) with ads of services/products they have recently looked at but not purchased with the hope of translating these window shopping instances into purchases. With personalised advertisements, the idea is to go one step further by trying to understanding the users (i.e., understand the users tastes and preferences, their recent browsing activities, and their purchasing habits) by mapping these patterns into models based on data from a very large sample of users using machine learning and data mining algorithms, with the express goal of facilitating ad placements that users are most likely to engage with.

For example, in a fairly recent month, 27% of the products sold to consumers to whom they displayed their ads were products that those consumers had not previously viewed on the client’s website but had seen on CRTO’s placed ads. They have enough confidence in their method of placing ads that they are willing to, and can afford to, charge the client ONLY when a prospective customer CLICKS on the ad, not when it is just displayed. This in turn allows clients to give them UNLIMITED BUDGETS for placing ads as the client will only be charged for ads when they are bringing in customers.

Now, I’d give you some of the results from the last earnings report for last quarter and the last year in Euros, (Euros are bigger than dollars and 1.00 Euro is roughly equal to $1.25).

Gross Reveue was up 70% year over year, from 114 million to 194 million. It was up 17.6% sequentially from 165 million.

Revenue ex-TAC (which is more important) was up 66% year over year from 47 million to 78 million.

Adjusted EBITDA was up 70.7% from 11.6 million to 19.8 million, and up 50% sequentially and up 36% from the previous record in the March quarter.

Adjusted Earnigs per share was 27 euro cents (or about 34 US cents) and up more than 100% from 12 euro cents the year before. Also more than double the previous record of 13 euro cents in Dec.

Trailing adjusted earnings as I calculated them were 61 euro cents or 76 cents US. That gives them a trailing PE of 51, which should be a lot lower after the next quarter’s earnings.

12 month trailing revenue ex-TAC was 263 million, up 65.4% from 159 million a year ago.

12 month trailing adjusted EBITDA was 62.0 million, up 191% from 21.3 million the year before.

Putting all that together gives you an idea why I thought that CRTO had better prospects than UBNT, which has been pretty stagnant for close to a year.

I’ll say some words on FB another time.

Saul

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Hi Neil,

I agree with your arguments for holding onto UBNT. I see where Saul is coming from, especially the slowing growth in the past few quarters, but I think we need to watch for few more quarters as to how their business is scaling.

The disruptive business model means a lot to me. Someday, it could challenge the stalwarts in areas broader than just the WISP market. I also like strong insider ownership and the focus on the long-term. I actually thought Pera did very well in the earnings call. I tuned into the call and thought he handled it reasonably well. The valuation is dirt cheap … the valuation is giving no credit for their disruptive business model.

UBNT is one of my higher conviction positions, and I will look to hold it. I need to see a few more quarters before I can consider selling it.

Of course, Saul has substituted his UBNT position with FB and CRTO, two other high conviction positions for me.

Anirban

Long UBNT, FB, and CRTO!

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Saul, do you still have SYNA? If so, then out of curiosity, what made you choose to hold onto it over UBNT? SYNA seems much, much riskier to me as a traditional tech company in a cut-throat market (always having to constantly invest heavily to stay ahead of the pack, always fighting to keep margins from being squeezed too badly by customers and investment), but maybe I’m not thinking about it correctly.

Neil

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Saul, do you still have SYNA? If so, then out of curiosity, what made you choose to hold onto it over UBNT? SYNA seems much, much riskier to me as a traditional tech company in a cut-throat market (always having to constantly invest heavily to stay ahead of the pack, always fighting to keep margins from being squeezed too badly by customers and investment), but maybe I’m not thinking about it correctly.

Hi Neil, I’ve reduced my position somewhat in SYNA too, for all those same reasons. However, they have given an outlook for this quarter of $1.00 to $1.30 as I remember. I presume they hope to top the range, but say they don’t and hit $1.25. That will be up from 86 cents, and up 45% year over year. In addition, they have two important new major acquisitions coming progressively online, the fingerprint one and Renesas, which they feel will transform their company. That’s why I’ve been giving them a little more slack than UBNT.

Saul

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Thanks, Saul.

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This thread has been great and makes me glad I started following this board. Thanks to Neil and Saul both for the interesting contributions. I’m long UBNT. After doing some research and watching it for 6 months or so, I began a position which I added a bit to during a drop. I have not added since the last earnings call, but I defended my reasons for investing in the company on these boards after hearing folks chide Pera for his handling of the call.

Myself, I still believe in UBNT, but Neil basically captured every one of the reasons why. So thanks for saving me the effort Neil.

I’ve been investing for a scant 3 years and have learned so much through MF and these boards. Such a great community to be a part of and absorb knowledge from.

Thanks,
A.J.

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